SIA announces USD 10y senior unsecured bonds at FPG of T+110bps

Important Events

Singapore Airlines Limited (SIA) plans to issue new USD 10y senior unsecured bonds at a final price guidance of T+110bps, for accredited and institutional investors only.

The issuer SIA is currently unrated, while this new issue is also expected to be unrated. Proceeds from this issuance will be used for aircraft purchases and aircraft-related payments, as well as general corporate or working capital purposes, including refinancing of existing borrowings.

Highlights

All dollar values in SGD, and all growth rates are on a year-on-year (YoY) basis unless otherwise stated. Our article will cover a quick overview of SIA’s 3Q23/24 financials (ended December 2023), but we also encourage investors to read some of our previous articles for greater context.

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SIA’s 3Q23/24 revenues came in at $5.1b, marking a 5% increase from the previous period’s $4.8b, and also marking a record high as it was the first time SIA recorded revenues of over $5b in a single quarter. 9M24 revenues also showed a solid +7% growth to $14.2b.

• This was mainly due to tailwinds from robust passenger demand amidst a continued reopening and travel recovery, with the passenger sub-segment seeing a +11% increase in revenues to $4.2b. As a group, passenger load factor remained robust at 88.6% in 9M23/24, much higher than FY19/20 (pre-pandemic) levels of 82.4%; similarly, revenue-per-available-seat-kilometre was reported at 9.7c/ask, higher than FY19/20 levels of 7.5c/ask.
• On the other hand, cargo revenue saw a decline of -35% to $559m in the quarter on the back of falling cargo yields. Nonetheless, management has stated this is more of a normalisation towards pre-COVID levels and we agree with this assessment - FY19/20 cargo yields were about 30.5c/ltk, and despite normalisation over the past few quarters, recent 9M23/24 cargo yields remain higher at 41.2c/ltk.

Overall, SIA revenues (in 3Q23/24) remain robust. We think the passenger segment has continued to do well, while the cargo segment appears to be showing signs of normalisation from the pandemic rather than any meaningful structural decline.

We also observe that total expenditures rose 9% to $4.5b, due to a mix of both fuel and non-fuel costs. These higher expenditures, coupled with the aforementioned declines in cargo revenue, were a key driver in the fall in quarterly operating profit from $755m in 3Q22/23 to $609m in 3Q23/24 (-19%) (Chart 1). Nonetheless, we emphasise that SIA still delivered positive growth in net profits (+5%) with factors like lower tax expense (+$124m) mitigating the lower operating profit (-$146m).

As for SIA’s credit profile, SIA has reduced its debt slightly over the past 9 months, with total levels falling from $15.3b in FY22/23 to $13.7b in FY23/24; nonetheless, we also acknowledge its total-debt-to-equity ratio has worsened slightly from 0.77x in FY22/23 to 0.88x in FY23/24. With that being said, SIA held a cash pile of $10.5b as of FY23/24; based on our estimates, that would result in a net debt-to-equity ratio of just 0.21x. As such, we think SIA’s sizeable cash pile helps to minimise liquidity risks, and SIA as an issuer continues to have a decent credit profile.

Looking ahead, management themselves has started to caution that passenger yields are coming under pressure as capacity is gradually restored on a global level, leading to heightened competition. Our view is that we don’t expect SIA to continually break records every quarter (just as they did in 3Q23/24 for revenues), though earnings should remain relatively high with travel demand still looking robust. As a whole, we remain fairly optimistic about SIA’s profit outlook and its ability to repay its bonds.

Thoughts on new issue

The new issue’s FPG of T+110bps represents an indicative coupon and yield-to-maturity of about 5.300% based on a 10y UST yield of 4.200%. This 5.3% indicative yield and 110bps spread are slightly lower than some of its existing USD bonds maturing in 2026 and 2029 (which have I-spreads of about 118bps / 135bps respectively) (Table 1).

We also highlight the duration risks present in this bond, considering its fairly long maturity compared to other SIA’s existing USD bonds. Investors who choose to purchase this bond over the other shorter-tenor USD bonds from SIA should note that this bond will be relatively more sensitive to the broader interest-rate environment.

We think this new issue is fairly priced relative to other outstanding USD bonds from SIA. Investors who are looking for a longer-dated bond (10y) may find this bond interesting considering the general lack of longer-tenor bonds within the airline industry. Investors looking for airline bonds in general, particularly shorter-tenor ones, can also consider those from SIA, Cathay Pacific and Korean Air which we have previously covered in our recommendations.

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Table 1: Comparison against peers

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.

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